Tag Archives: #trendless

A New Paradigm

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No matter the asset you trade
For weeks, every move’s been a fade
As headlines decry
Each thing Trump does try
Investors are feeling betrayed
 
They want to go back to the time
When markets did, every day, climb
But that time has passed
And I would forecast
We’ve entered a new paradigm

 

The following onslaught of charts from tradingeconomics.com are meant to highlight that for the past several weeks, basically nothing has gone on in markets.  Every day is like every other, and the only trend is a horizontal line.

Now, this is not to say that each movement is identical, just that any longer-term trends that may exist are not evident lately.  For traders, this can be terrific because there has been volatility which can be captured.  Of course, since much of the volatility has been headline bingo, that reduces the appeal.  But for longer term investors, it is a more difficult situation as those same headlines can call into question the underlying thesis of any or every trade.

Are the tariffs here to stay?  Or will they be overruled?  Is the “Big Beautiful Bill” going to be a benefit?  Or are there too many things hidden within that will impact the economy, markets and investor behaviors?  Is there going to be a Russia/Ukraine peace?  Is Iran going to sign a deal?  Will the US and China agree a trade deal?  Obviously, there are many very large issues currently outstanding with no clear resolutions in any of them as of now.  When you consider not only that the future is uncertain (which is always true) but the potential outcomes are diametrically opposed, it is easier to realize why markets are stuck in the mud.  But hey, nobody ever said trading was supposed to be easy!

There is, however, one issue I think worth highlighting that has seen an increase in discussion, and that is Section 899 of the reconciliation bill.  It is titled, “Enforcement of Remedies Against Unfair Foreign Taxes” and Bloomberg has a solid description here.  The essence of this clause is it increases taxes on nations, and individuals in those nations, who discriminate against US companies.  The idea is that Europe, especially, is busy enacting “Digital Services Taxes” which are designed to extract revenue from the large US tech companies that dominate particular spaces, like Meta, Google and Microsoft.  But these tax laws have thresholds such that essentially no other companies will be impacted.  This is the US response.  

Much of the discussion thus far has focused on the idea that this will discourage investment in US financial assets, potentially reducing the market for Treasury bonds and adding to the destruction of American exceptionalism in financial markets.  And it may well do that.  However, the thing to consider is that one of the reasons that the US has drawn so much investment is that there are so many investable securities here in the US, and that property rights remain sacrosanct.  Yes, taxation matters, but if you are a sovereign wealth fund with $100 billion in assets or more, where are you going to invest that money if not in the US, at least in some part?  And remember, this is only to be focused on nations with discriminatory taxes vs. US companies.  So, the Saudis, for example, or the Japanese need not worry.  It strikes me that at the margin, this could have a modest impact on prices, perhaps softening the dollar some and reducing future gains, but this is unlikely to end investment into the US.

Ok, let’s quickly run through the lack of overall movement last night.  Yesterday’s early US equity gains (triggered by the tariff ruling) faded all day and markets here closed very modestly higher.  In Asia, gains from yesterday were largely reversed as an appeals court stayed the ruling, so the tariffs remain in place as of now.  Thus Japan (-1.2%), Hong Kong (-1.2%) and China (-0.5%) basically reversed yesterday’s closings.  In Europe, though, things are a bit brighter. With gains across the board as inflation data released showed that it continues to drift lower across the continent.  This has encouraged traders to believe that more ECB rate cuts are coming, which was confirmed by the Bank of Italy’s Fabio Panetta, an ECB Governing Council Member, who exclaimed that inflation is nearly beaten.  Meanwhile, bank economists are now warning that further rate cuts need to come more quickly.  All this, of course, is music to equity investors’ ears.  As such, gains range from +0.3% (France) to 1.0% (Germany) and everywhere in between.  As to US futures, they are unchanged at this hour (7:30).

In the bond market, Treasury yields are unchanged this morning after sliding 8bps yesterday.  Interestingly, European sovereign yields, which also fell yesterday, have rebounded 3bps this morning despite the happy talk of more ECB rate cuts and the imminent death of inflation.  Too, last night saw yields decline in Japan (-3bps) and Australia (-11bps), following in the footsteps of yesterday’s Treasury market.

In the commodity markets, oil (+1.3%) is higher after EIA data yesterday showed modest inventory draws while gold (-0.75%) is giving back yesterday’s gains which came on the back of a weak dollar.  But as mentioned at the beginning of this piece, in the end, trends in both directions are on hold for now.

Finally, the dollar is firmer this morning, unwinding some of yesterday’s declines which grew throughout the day.  Right now, in the G10, the euro (-0.3%) is a pretty good proxy for the entire bloc, although JPY (+0.15%) is sticking out like a sore thumb.  In the EMG bloc, we see declines on the order of -0.5% (KRW, PLN, ZAR) although MXN (+0.2%) is also an aberration this morning.  Alas, I see no particular reason for this move.  However, as mentioned above, the recent trend is flat, although I cannot get over the idea that the dollar has further to decline going forward.

On the data front, this morning brings Personal Income (exp 0.3%), Personal Spending (+0.2%), PCE (0.1%, 2.2% Y/Y), and Core PCE (0.1%, 2.5% Y/Y) as well as the Goods Trade Balance (-$141.5B) all at 8:30.  Then we see Chicago PMI (45.0) and Michigan Consumer Sentiment (51.0) at 10:00.  There is one final Fed speaker this week, Atlanta’s Bostic this afternoon.  However, when it comes to the Fed, again yesterday we heard that patience is the watchword with no hurry to adjust policy right now.  As well, we learned that Chairman Powell had lunch with President Trump yesterday, where Trump asked him to lower rates, and Powell said they are following their long-proscribed tasks of responding to economic outcomes. 

There is nothing that seems likely to excite anyone today, so I look for a quiet session overall.  It seems unlikely that anything of note will be resolved, whether on a political or international relations basis, so look for a quiet session and a relatively early close as traders and investors head out for a summer weekend.

Good luck and good weekend

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Confusion

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Confusion continues to reign
O’er markets though pundits will feign
That they understand
The movements at hand
Despite a quite rocky terrain
 
The speed with which Trump changes views
Can even, the algos, confuse
The pluses, I think
Are traders must shrink
Positions, elsewise pay high dues

 

For the longest time I believed that the algos were going to usurp all trading activity as their ability to respond to news was so much faster than any human.  Certainly, this has been the key to success for major trading firms like Citadel and Virtu Financial.  And they have been very successful.  I think part of their success has been that we have been in an environment where both implied and actual volatility has declined in a secular manner, so not only could they respond quickly, but they could lever up their positions with impunity as the probability of a large reversal was relatively less.

However, I believe that the algos and their owners may have met their match in Donald Trump.  Never before has someone been so powerful and yet so chaotic in his approach to very important things.  Many pundits complain that even he doesn’t have a plan when he announces a new policy.  But I think that’s his secret, keep everyone else off balance and then he has free reign.  Chaos is the goal.

The market impact of this is that basically, for the past three months since shortly after his election, the major asset classes of stocks, bonds and the dollar, have chopped around a lot, but not moved anywhere at all.  How can they as nobody seems willing to believe that the end game he has explained; reduced deficits, reduced trade balance, lower inflation and a strong military presence throughout the Western Hemisphere, is going to result from his actions.  And in fairness, some of the actions do have a random quality to them.  But if we have learned nothing from President Trump’s time in office, including his first term, it is that he is very willing to tell us what he is going to do.  It just seems that most folks don’t believe he can do it so don’t take it seriously.

So, let’s look at how markets have behaved in the past three months.  The noteworthy result is that the net movement over that period has been virtually nil.  Look at the charts below from tradingeconomics.com:

S&P 500

10-Year Treasury

EUR/USD

While all these markets have moved higher and lower in the intervening period, they have not gone anywhere at all.  The biggest mover over this time is the euro, which has rallied 0.54% with the other major markets showing far less movement than that.

One interesting phenomenon of this price action is that despite significant uncertainty over policy actions by the President and the implications they may have on markets, and even though recent price action can best be described as choppy rather than trend like, the VIX Index remains in the lowest quartile of its long-term range. Certainly, it has risen slightly over the past few weeks, but to my eye, it looks like it is underpricing the chaos yet to come.  

Source Bloomberg.com

While I have no clearer idea how things will unfold than anyone else, other than I have a certain amount of faith that the President will achieve many of his goals in one way or another, I am definitely of the belief that volatility is going to be the coin of the realm for quite a while going forward.  We have spent the past many years with numerous strategies created to enhance returns via selling volatility, either shorting options or levering up, and that is the trend that seems likely to change going forward.  The implication for hedgers is that maintaining hedge ratios while having a plan in place is going to be more important than any time in the past decade or more.

Ok, let’s take a look at how markets did move overnight.  Yesterday’s net negative session in the US was followed by similar price action in Asia.  Tokyo (-1.4%), Hong Kong (-1.35) and China (-1.1%) all suffered on stories about tariffs and extra efforts by the Trump administration to tighten up export controls on semiconductors.  It should be no surprise that virtually every index in Asia followed suit with losses between -0.3% (Singapore) and -2.4% (Indonesia) and everywhere in between.  Meanwhile, in Europe, the picture is not as dour as there are a few winners (Spain +0.9% and Italy +0.5%) although the rest of the continent is struggling to break even.  The data point that is receiving the most press is Eurozone Negotiated Wage Growth (+4.12%) which rose less than in Q3 and has encouraged many to believe the ECB will be cutting rates next week.  Interestingly, Joachim Nagel, Bundesbank president was on the tape telling the rest of the ECB to shut up about their expectations of future rate moves as there is still far too much uncertainty and decisions need to be made on a meeting-by-meeting basis.  Apparently, oversharing is a general central bank affliction, not merely a Fed problem.  As to US stocks, at this hour (6:50) they are little changed.

In the bond market, yields continue to slide, at least in the US, with Treasury yields down -6bps this morning and back to levels last seen in December.  Apparently, some investors are beginning to believe Secretary Bessent regarding his goal to drive yields lower.  As well, he has reconfirmed that there will be no major increase in the issuance of long-dated paper for now.  European sovereigns, though, are little changed this morning with only UK gilts (-3bps) showing any movement after the CBI Trades report printed at -23, a bit less bad than expected.

In the commodity markets, oil (-0.15%) is little changed this morning after a very modest rally yesterday.  But the reality here is that oil, like other markets, has been in a trading range rather than trending, although my take is that the longer-term view could be a bit lower.  Gold (-0.35%), though lower this morning, is the one market that has shown a trend since Trump’s election, and truthfully since well before that as you can see in the chart below.

Source: tradingeconomics.com

Finally, the dollar is a touch softer this morning, with both the euro and pound rising 0.3% alongside the CHF (+0.3%) and JPY (+0.2%). Commodity currencies, though, are less robust with very minor losses seen in MXN, ZAR and CLP.  Given the decline in 10-year yields, I am not that surprised at the dollar’s weakness although it is in opposition to the gut reaction that tariffs mean a higher dollar.  This is of interest because yesterday President Trump confirmed that the 25% tariffs on Canada and Mexico were going into effect next week.  As I explained above, it is very difficult to get a sense of short-term price action here although given the clear intent of the president to improve the competitiveness of US exporters, he would certainly like to see the dollar decline further.  

It is very interesting to watch this president reduce the power of the Fed with words and not even have to attack the Chairman like he did in his first term.  It will be very interesting to see how Chair Powell responds to the ongoing machinations.

On the data front, this morning brings only the Case-Shiller Home Price Index (exp +4.4%) and Consumer Confidence (102.5).  We do hear from two Fed speakers, Barr and Barkin, but as I keep explaining, their words matter less each day. (It must be driving them crazy!)

It is hard to get excited about markets here.  There is no directional bias right now and the lack of critical data adds to the lack of information.  As well, given the mercurial nature of President Trump’s activities, we are always one tape bomb away from a complete reversal.  While I don’t see the dollar collapsing, perhaps the next short-term wave is for further dollar weakness.  

Good luck

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